New Libyan parliament meets far from urban battlegrounds

* Parliament to start voting on Monday in Tobruk (Adds details on fighting, British evacuation plan)

By Ayman Al-Warfalli

TOBRUK, Libya, Aug 2 (Reuters) - Libya's newly elected House of Representatives held its first session on Saturday, holed up in a heavily guarded provincial hotel as armed factions turned the two biggest cities, Tripoli and Benghazi, into battlefields.

Western governments, which have mostly evacuated their diplomats after two weeks of fighting, hope the new parliament can create space for negotiations after the worst clashes since the 2011 war that ousted Muammar Gaddafi.

But there was no sign of a let-up in the capital, Tripoli, where a huge cloud of black smoke spread over the south of the city again on Saturday after a fuel depot near the international airport was hit for the second time in a week as rival Zintan and Misrata brigades battled for control.

In southern Tripoli, at one of the front lines between warring factions, one block of partially built apartments was on fire after being hit. Nearby streets were littered with shell casings from machine-gun fire where Zintan fighters had defended their positions.

Fighting with rockets, anti-aircraft cannon and other heavy artillery in Tripoli and the eastern city of Benghazi has killed more than 200 people, and edged Libya closer to full-scale civil war just three years after the NATO-backed revolution.

Britain became the latest Western government to announce it would close its embassy, fearing being caught in the crossfire.

Sky News reported on Saturday that a Royal Navy vessel was moving into position off the coast of North Africa, preparing to evacuate British nationals from Libya. Britain's Ministry of Defence said it did not give details of any assistance it was providing for operational reasons.

With its national army still in formation, Libya has struggled to control heavily armed factions that have entrenched themselves as de facto power brokers in the messy transition since Gaddafi's one-man rule.

Elected in June, lawmakers met on Saturday for an emergency session in Tobruk, a coastal city east of Benghazi, where they are supposed to form a new government that many Libyans hope will be a step to ending the crisis.

"Our homeland is burning," Abu Bakar Baira, interim head of parliament said. "We have to work fast, to meet the demands of the people and save them from this disaster."

The 200-member parliament will hold its first official session to elect its new president on Monday, Baira said. Some deputies aim to form a new Cabinet to handle the crisis, three of them told Reuters.

Three years after Gaddafi's demise, few Libyan state institutions have popular legitimacy and the country still has no new constitution. Militias stormed the last parliament repeatedly to threaten lawmakers.

Heavily armed Interior Ministry troops and the Libyan army protected the Tobruk hotel that was chosen to host the parliament meeting after Tripoli and Benghazi were deemed too risky.

Western countries are worried Libya's escalating conflict could create a failed state just across the Mediterranean from mainland Europe. Fearing the violence could spill beyond Libya's borders, neighbours Egypt, Tunisia and Algeria all warn of the danger a failed Libya would pose.

Hundreds of Egyptians clashed on Friday with Tunisian border guards when they tried to force their way out of Libya, fleeing the fighting in Tripoli. Tunisia temporarily closed its frontier with Libya.

TWO CITIES IN CLASHES

Brigades of former anti-Gaddafi fighters from the western town of Zintan, and others from the town of Misrata and their allies have been fighting for nearly three weeks over the control of Tripoli's international airport.

The battle is part of a wider struggle involving Islamists, tribal leaders, federalists, nationalists and armed groups vying for the spoils of post-Gaddafi Libya and to shape the future of the OPEC producing country.

On Saturday, sporadic shelling resumed in the capital after two days of relative calm. Plumes of black smoke rose over the south of Tripoli from a burning fuel tank at the airport's fuel depot.

"A rocket fell and hit a new tank full of gasoline at the start of Saturday afternoon," National Oil Corp spokesman Mohamed al-Harari said. "Firefighters have pulled out again because of the fighting."

Firefighters battled for days, sometimes under fire, to control a huge blaze ignited a week ago when the same fuel depot was hit by a rocket.

Benghazi was calmer on Saturday, four days after an alliance of Islamist militants from the Ansar al-Sharia group and ex-rebels drove the armed forces out of a special forces base and overran a major police station.

Ansar al-Sharia is designated a terrorist group by Washington, which blames it for an attack on the U.S. mission there that killed the U.S. ambassador in 2012.

The Islamist alliance, called the Benghazi Revolutionaries Shura Council, has kept off the streets over the past three days, although it remains the main military force inside the city, Reuters reporters there said.

Britain said late on Friday it would close its embassy from Aug. 4, evacuating staff to Tunisia.

Britain was one of the last Western countries with an embassy open in Tripoli after the United States, the United Nations and most European states pulled their diplomatic staff.

"Reluctantly we've decided we have to leave and temporarily suspend embassy operations in Libya," British Ambassador Michael Aron said on Twitter. "The risk of getting caught in the crossfire is too great."

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